Ruminations, July 11, 2010

The Obama economic recovery program is faltering – andit’s all Obama’s

President Barack Obama has frequently blamed the economic problems of the country on his predecessor George W. Bush. There is something to that: after all, Obama did inherit the results of Bush policies (as Bush inherited the results of Clinton’seconomic policies and Clinton inherited … well, you know).

But it’s a complex world and if presidents were as effective as they’d like us to believe, we’d never suffer from economic downturns and would have nothing but economic booms. Alas, such is not the case. But sometimes, we can infer economic situations from the actions of a president.

We know that actions taken by Obama have caused businesses to have a lack of confidence in the future and to hold their assets in cash rather than invest it. (See http://www.examiner.com/x-15968-Hartford-Independent-Examiner~y2010m6d13-Obama—copies-Roosevelts-mistakes—While-the-US-spends-Europe-saves—will-this-work.)

Obama’s mantra is that Bush forced him into massive spending programs in order to save the economy and saving it he is. Although unemployment has increased since the implementation of Obama’s stimulus program and the economy has not begun to rebound, Obama says it would be worse without the stimulus. It’s an argument that’s hard to proveor disprove – or is it?

“One year into the global recovery, the U.S.is lagging far behind other major economies in restoring jobs lost in the recession,” writes Mark Whitehouse in the July 11 edition of the Wall Street Journal. And there is a difference between Obama’s economic directives and the other major economies.Obama’s are at odds with other countries in the G20: The U.S. plans to rely on more government spending while the rest of the world plans to cut government spending and balance budgets in short order.

According to Whitehouse, the two most salient features of recovery are “manageable debt burdens and healthy banking systems.”

Have Obama’s policies had an effect on debt and on banking? Most assuredly they have had an effect on debt where private and public debt has reached unprecedented and unsustainable levels.

As far as a healthy banking systems goes, Obama did propose changes to banking regulation which, in broad terms, were well-founded. Unfortunately, when the detail was fleshed-out,something appeared that economic historian Niall Fergusson has called,“regulate first, ask questions later.” Furthermore, nothing was done to address the primary culprits of the economic meltdown:

1. The policies of The Federal National Mortgage Association (Fannie Mae) and The Federal Home Loan Mortgage Corporation (Freddie Mac) were based up social engineering rather than fiscal probity. And they continue to operate much in the manner that they did prior to the economic crisis.
2. The too-big-to-fail syndrome. The 10 largest U.S. banks assets are equal to 80 percent of the Gross Domestic Product (GDP). While some positive steps have been taken (e.g., the “Volker Rule”), theses banks will still be bailed out by the government if necessary.

And if we accept that we need to increase the ability of banks to lend, then the $19 billion in taxes that had been proposed to levy on banks would have been counter-productive.

So, it is arguable that Obama’s policies have led to uncertainty in the economy resulting in the reluctance of business to borrow and the reluctance of bankers to lend. And he has increased public debt to record levels while proposing little to reform the financial system. And that is something that Bush didn’t make business and bankers do – Obama did.

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George Soros, author,investor and liberal political activist, writing in the August 19 edition ofthe New York Review of Books: “The euro boasts a common central bank but itlacks a common treasury. It is exactly that sovereign backing that financialmarkets are now questioning and that is missing from the design. That is whythe euro has become the focal point of the current [European financial] crisis.”